There is plenty of evidence that oil is, in fact, still pretty long – and that this bull-run is yet again about speculators talking up the market. Petrochemical producers and end-users who rush-in to build raw-material inventory do so at their peril.

“The crude price has to be about speculation because there is still 6m bb/day of spare crude output,” an oil and refining consultant told the blog late last week on the sidelines of the Gulf Petrochemicals and Chemicals (GPCA) conference in Dubai.

“There is also still 2-3m bbl/day of surplus refinery capacity and gasoline inventories in the US were recently five times their historic average.

“The banks have once again a lot at stake in making the crude bull argument. Refinery margins will recover next year, but not by that much. It will be the complex, full-conversion refineries that will benefit the most and not the simple refineries.

“Even diesel inventories are high in the US and have been at comfortable levels in Europe, despite the cold weather.”

Source of picture: Arabianbusiness.com

One immediate benefit for petrochemical supply and demand balances is that the OPEC decision will mean no further associated gas supplies to boost Middle East output. We discussed this last week when we reported that quotas were forecast to remain unchanged.

As far as the immediate effect on polyethylene (PE) pricing is concerned (a reasonable proxy for the polymers industry as a whole), higher crude in response to the OPEC verdict might exert some upward pressure.

But the negative factors in the China dominated the mood late last week.

Importers were staying on the sidelines fearing what our colleagues at ICIS pricing said could be a “meltdown in the commodity markets” as a result of further measures by China to control inflation.

More bad economic news emerged at the end of last week. China’s inflation rate rose to 5.1% in November, up from 4.4% in October – leading to a further increase in the bank-reserve requirement.

A three-day government conference to set economic policy for 2011 ended on Sunday with the following statement released to the media: “Strategic economic restructuring will be accelerated and stabilising price levels will be given a more prominent position.”

The excellent China Economic Quarterly – the Beijing-based research service – was predicting several further interest-rate rises and additional hikes in the bank-reserve requirement during 2011, even before last week’s government meeting.

Further monetary tightening now seems even more likely in light of the official comment we have just quoted.

“I think the current uncertain, worried mood in the market will persist until March next year,” a polyolefin trader told us, again on the sidelines of the GPCA.

“Some more clarity, and perhaps a bit more confidence, should emerge after then – when the National People’s Congress (NPC) meets to confirm more details of the 12th Five-Year Plan.”

Any price rises up until March will therefore be in response to higher crude and could well be only minor and subject to sudden reversals, he believes.

Whether even the NPC meeting will change the mood has to be in question as the key issue for market confidence is how quickly China can bring inflation under control.